The International Swaps and Derivatives Association (ISDA) announced Friday that a bankruptcy credit event had occurred in respect to Ambac Assurance Corp.

The announcement follows a decision by Ambac’s regulator, the Wisconsin insurance commissioner, to put some $35 billion of the insurer’s risky assets into “rehabilitation.”

ISDA said it voted to hold an auction for Ambac and will publish the terms of the auction “in due course.” In the auction, to be administered by Markit and Creditex, the maximum amount that will change hands is $3.0 billion, according to March 19 data from the Depository Trust & Clearing Corp.

Any investor holding CDS on Ambac Assurance and betting on its demise will be pleased with the ISDA ruling, but it won’t harm the insurer directly, as the CDS contracts are third-party transactions not directly involving its balance sheet.

Ambac Financial Group, the insurer’s parent, said in Thursday’s press release that it “does not believe the segregated account rehabilitation constitutes an event of default under its bond indenture.”

But according to ISDA definitions, section 4.2, “bankruptcy” may refer to an entity that “becomes insolvent or is unable to pay its debts or fails or admits in writing in a judicial, regulatory, or administrative proceeding or filing its inability generally to pay its debts as they become due.”

Also Friday, Moody’s Investors Service lowered the rating of the senior unsecured debt of Ambac Financial to 'C' from 'Ca', But, it placed the 'Caa2' insurance financial strength ratings of Ambac Assurance on review for possible upgrade. The agency said that by settling the insurer’s riskiest exposures, the restructuring agreement should improve the credit for Ambac Assurance’s senior unsecured policyholders.

Ambac Financial stock fell 14.1 cents, or 21.3%, to close at $0.52 Friday; down 35.2% for the week.

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